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Daily Newsletter, Thursday, 12/18/2003

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Thursday 12-18-2003
Copyright 2003, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Option Blowout!
Futures Markets: Equities Rally, Volatility Crashes
Index Trader Wrap: See Note
Market Sentiment: The Return of the NASDAQ
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
12-18-2003 High Low Volume Advance/Decline
DJIA 10248.08 +102.90 10254.08 10137.34 1.92 bln 2388/ 838
NASDAQ 1956.18 + 34.90 1957.68 1924.62 1.71 bln 2185/1075
S&P 100 540.49 + 5.29 540.66 535.20 Totals 4573/1913
S&P 500 1089.18 + 12.70 1089.50 1076.48
W5000 10582.82 +127.40 10585.96 10455.22
RUS 2000 546.90 + 8.18 547.62 538.07
DJ TRANS 2987.16 + 20.90 2987.48 2953.76
VIX 16.16 + 0.58 16.19 14.66
VXO (VIX-O)16.25 + 0.90 16.30 14.54
VXN 24.53 - 0.59 25.36 24.07
Total Volume 3,949M
Total UpVol 3,296M
Total DnVol 592M
52wk Highs 664
52wk Lows 35
TRIN 0.55
NAZTRIN 0.42
PUT/CALL 0.65
************************************************************
Option Blowout!
Maximum pain was inflicted to call option writers this month
and the result was broken resistance and new 52-week highs.
The quadruple witch week caught traders off guard with prices
well above those where they wrote the options and the short
covering began in earnest at the open. Once it was obvious
the market was not going to dip and give them a cheaper exit
the short covering began. It was still continuing at the
close despite strong resistance finally slowing the advance.
Dow Chart - 120 min
Dow Chart - Weekly
Nasdaq Chart - 120 min
Nasdaq Chart - Weekly
Helping to stimulate the shorts to cover were blowout numbers
in both the Chicago Fed Index and the Philly Fed Survey. The
Chicago Fed National Activity Index posted a +0.55 headline
number for November compared to only +0.19 for October. The
three month moving average jumped to +0.33 from +0.01. Output
components added +0.44 to the index with employment components
only providing a negative drag of -0.05. This was the first
three consecutive months of positive gains in three years.
The Philly Fed Survey also blew past estimates of 25.0 with
a 32.1 headline number. Shipments jumped to 41.1 from 26.8
and new orders jumped to 41.8 from 20.8, almost doubling!
Back orders rose to 17.5 from 9.0 and employees actually
spiked to 21.9 from only 3.3. This was a VERY positive
report and when accompanied by the Chicago report on the
same day they are probably dancing in the halls at the Fed.
The Philly Survey had many positive comments but they also
said that overall "expectations" for the next six months
remain positive but most future indicators were lower. This
means there was a spike in manufacturing but the survey
respondents are beginning to ratchet down their expectations
for 2004. This could be just caution and an easing of the
bullish sentiment into something closer to reality. As long
as the current conditions continue to improve nobody is
going to complain.
Jobless Claims fell more than expected to only 353,000 from
375,000 last week. For the first time in over 90 weeks the
number for the prior week was revised down as well. That
was a real surprise. It was only -3,000 but we will take
what we can get. Evidently the Thanksgiving holiday did
skew the numbers into the following week and that skew has
now been corrected. This suggests we could be under 350,000
soon assuming there are no mass layoffs after the holidays.
Unfortunately January is known for companies going on an
employee diet and starting the new year from a trimmed
down level. Still the trend is positive and we hope to see
that sub 350K number in 2004.
The markets got some help from the retail sector after WMT
and BBBY were upgraded to buy from neutral by UBS. BBBY
raised estimates by +2 cents yesterday after reporting an
increase in same store sales of +6.4%. Wal-Mart announced
today they were launching a website where consumers could
download songs for 88 cents a title, -11 cents less than
Itunes. The category killer is looking for another category
to invade. With the Wal-Mart clout they are sure to attract
attention and market share in whatever they do. Wal-Mart
had said on Monday that same store sales were tracking at
the low end of estimates at around +3%. Retailers will have
their chance to catch up this weekend. 41% of holiday sales
are made between Dec-17th and Dec-24th. Saturday is the
biggest shopping day of the year. Analysts have reported
some pickup in sales this week with the weather better
than the prior week.
Chip stocks are likely to get some help tomorrow after the
Book-to-Bill number came in at 1.04 tonight. Last months
number was revised up to 1.01 making November the second
consecutive positive month. The November 1.04 was the
highest level since the 1.02 in August 2002. The number
reached a low of 0.78 in October 2002. Orders climbed
+6.9% in November for the fourth monthly rise. The rate
of increase in all the components is slow but at least it
is continuing to increase.
Intel is rumored to be announcing a chip for those large
screen HDTV sets that will significantly lower the cost
of the units. They are expected to announce this chip at
the January 8th Consumer Electronics show in Las Vegas.
This is a good step for Intel as it puts them into
the consumer market with a high dollar product that is
likely to have high margins. Current manufacturers are
TXN, HIT, PHG and SNE. Because of Intel's capacity and
technology they are expected to be a major player very
quickly. Analysts said TVs made with the Intel chip
could drop to the $2,000 range by next Christmas. The
same product now runs from $3,000 to $10,000. Seven
million HDTV sets will be sold in 2003 and they expect
more than twice that amount in 2004.
Naked call writers took it on the chin today or maybe I
should say took a hit in their wallet. The levels where
the most options would expire worthless and produce the
maximum profit for option writers were significantly
below the current market levels. Traders short calls
had been hoping for one more dip before the Santa rally
to buy back those calls or pickup stock to offset the
damage. When we did not get a failure on Wednesday after
Tuesday's gains they began to get nervous. Especially
when there was a sprint into the close. The futures
traded up overnight and traders held their breath at
the open. After a short period of volatility where
prices failed to fall the gold rush began. Traders
began to bite the bullet and buy stock. The Dow surged
to 10200 by 10:00 and that resistance held until 2:00.
Once the Dow cleared the 10200 level there was a strong
rush of short covering aided by a fast buy program at
2:30. The Dow finally topped at 10254 and gravity took
hold once again. There was no drop but the ceiling was
in for the day.
Even the Nasdaq was feeling the love again with a +35
point gain. The Nasdaq charged out of the gate and ran
smack into resistance just below 1950 and could not
break free until the 2:30 buy program. Once that line
broke the volume really spiked. The close at 1954 was
the highest close since Dec-4th. That was the day after
the Nasdaq touched 2000.
Needless to say there was a lot of surprised traders
and a lot of delighted funds. If the funds were holding
their breath last week with the dip below Nasdaq 1900
while watching their profits slip away then today was
a relief. With three real trading days left before
Christmas there is little risk that we are going down
hard. Skip three more days of zero volume and the
Christmas holiday and that leaves funds with only
three more days on pins an needles. Considering that
those light volume holiday days are typically bullish
the funds just got a "get out of 2003" free pass.
With the jump to strong resistance at 10250 today and
only stronger resistance above to 10300 the odds are
very good we are not going much higher. The good news
is the odds are very good we are not going much lower
either. There is simply too much riding on the year-end
close and the odds of going back under 10,000 are almost
nonexistent. The great press potential of a year-end
close over 10K and the massive profits the funds will
pocket at this level will keep everyone on the sidelines
feeding the bears just enough to keep them at bay until
January.
For Friday there are no material economic reports and
Monday is blank as well. This leaves us to trade on
continued bullish sentiment and holiday euphoria. With
a huge chunk of options expiration already out of the
way with the SPX and DJX options now history we will
not have as much upward pressure tomorrow. Odds are
very good that anybody who needed to cover has already
done so on the individual stocks and other indexes.
Any remaining scramble will occur at the open and then
traders will begin leaving for the holidays. With the
indexes other than the Nasdaq at new highs this is a
perfect opportunity for traders to clear the table and
take a long holiday. I have already received dozens of
emails from traders doing just that and signing off
until January.
With strong resistance at 10250-10300 and SPX 1100 the
odds of another blowout are very slim. The Nasdaq and
Russell are already well below their highs on profit
taking despite the strong gains today. Friday's close
is when the Nasdaq rebalance occurs and selling in those
issues being removed could be a drag. The S&P Indexes
are also being rebalanced at the close of business on
Friday. These rebalancings could produce some heavy
volume in late trading but it is not expected to have
a material directional impact on the market.
I am looking for a range bound market for the next week
between 10000-10300 and for volume next week to be very
slow. Volume on Thursday was good but not exceptional.
There were less than four billion shares traded across
all markets although the up volume was 6:1 over down.
If we can't break four billion shares on a day like
today you can imagine what next week will look like.
Investors are going to end this year with a smile on
their face and that includes me.
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Editor
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***************
FUTURES MARKETS
***************
Equities Rally, Volatility Crashes
Jonathan Levinson
SPX, OEX and DJX op-ex likely figured in a shockingly bullish day
that saw the VXO break to new lows below 15 and the Dow futures
break 10,200 with authority. ES futures broke to new yearly
highs as well above 1088, as the NQ played catch up for its
relative weakness during past weeks. The US Dollar Index tried
unsuccessfully to regain the 88 level, despite weakness in gold
and mining stocks. Treasuries advanced as well.
Daily Pivots (generated with a pivot algorithm and unverified):
Note regarding pivot matrix: The support, pivot and resistance
levels above are derived from the high, low and closing price
levels by a simple mathematical formula. They are not intended
to be predictive of market turning points or to serve as targets,
but rather represent the range retracement levels as generated by
the pivot algorithm. Do not think of them as market "calls"
or predictions. Like any technically-derived indicator or price
level, the pivot matrix values should be regarded as decision
points at which to evaluate current market conditions. Visit us
in the Futures Monitor for our realtime views of the various
markets covered here.
10 minute chart of the US Dollar Index
The move in the US Dollar Index took place on good economic news
this morning and then at noon, but the noontime Philly Fed data
was sold sharply. The weakness in the US Dollar has been thus
far relentless, but as of this writing the 87.70 level had
withstood a number of tests since Wednesday. The CRB dropped .22
to close at 261.13, with strength in heating oil, wheat, copper,
natural gas and crude oil futures.
Daily chart of February gold
February gold pulled back to an intraday low of 408.50 before
bouncing to near unchanged territory above 411, closing lower by
1.20 at 411.50. Because the daily cycle oscillators are trending
at the top of their range, we're seeing buy signals and sell
signals issue on even the slightest movements, and today's action
was sufficient for a sell. Until the lower rising bear wedge
trendline breaks, however, the oscillator signals should not be
trusted. That said, the next move *should* be to the downside,
as predicted by the bearish chart pattern as well as the toppy
oscillators. Until upper pattern resistance at 414 breaks, this
will be the forecast, but as we saw with equities today, upside
surprises can by no means be ruled out.
Daily chart of the ten year note yield
Ten year notes rallied as the daily cycle downphase again
delivered on its promise of a lower yield. The TNX dropped 4.8
basis points to close at 4.141%, with the 4.2% pennant trendline
holding as resistance. Lower Bollinger band support under the
yield is at 4.101%, which is next support, but the as the
downphase remains young, 4% looks like the next significant
support level to be tested.
Daily NQ candles
The NQ delivered fully to the upside for a change, blasting off
from yesterday's doji hammer and finally breaking above 1425-30
resistance for a 26 point or 1.85% gain. The NQ was the leader
today, with the YM trailing distantly behind,a reversal of the
Dow leadership of the past two weeks. I predicted last night that
such a move, while unlikely, would be sufficient to abort the
ongoing daily cycle downphase and give us a new daily cycle buy
signal. I was only half right, as the move left off on a bullish
kiss. A late afternoon pullback was enough to keep hope alive
for whatever bears remain in the market, and the failure to print
a full-on bullish upphase on today's strong move could be
construed as bearish. However, until 1425-30 support gets
broken, any move higher from here should give us the bullish
upphase that I anticipated on today's upside break of that level.
30 minute 20 day chart of the NQ
Today's upside blast cleared the confluence zone at 1425-30 while
stopping just above Fibonacci resistance with a high print of
1436.50. The move completed the 30 minute cycle upphase and left
off on a rollover, suggesting a downphase to commence from the
open tomorrow. However, as we spend much of the day watching the
intraday oscillators pinned in overbought, I'm inclined to take
the stochatics with a grain of salt until the Macd confirms with
its own bearish cross. Descending trendline resistance
connecting the highs this month is currently at 1444. If the NQ
does not roll over immediately, I'll be looking for next
resistance in that area.
Daily ES candles
While the NQ outperformed the ES and YM in percentage terms, it
did so from far below, due to its extreme relative weakness
during the past two weeks. The ES' 1.14% gain was sufficient to
print a new closing high for the year, above the bearish rising
wedge and limited only by the double-top resistance at the
overnight high printed by the Saddam rally on Sunday. This new
closing high for the year, with the ES firm until its 4:15 EST
close, suggests strength to follow into tomorrow morning.
20 day 30 minute chart of the ES
The ES spent most of that afternoon trending in overbought, and
its upside move in the last hour bore all the signs of a short
covering meltup, with the ES closing one tick below the session
and 52-week high. It's still sufficiently close to be subject to
the gravitational pull of the Sunday night top, but absent an
immediate reversal, the ES broke out to the upside today.
The weakness in the NQ that led to the preliminary signs of
rollover on the 300 minute stochastic was absent from the ES, and
once again bearish traders should await a Macd cross before
considering new positions. The ES, despite its relatively
smaller gain, won very valuable ground today.
Caution is suggested by the strong reversal in the VXO, which
spent hours below 15 but closed higher by 5.86% at 16.25. There
is no doubt that these moves were opex related, but the spike in
the VXO is a divergence that should have bulls snugging their
stops. With the likelihood that today's meltup was opex related,
and with the opening print setting the price for S&P and Dow
options, a reversal could come once that factor expires at
tomorrow's open.
150-tick ES
There's little to see here, as the oscillators were rendered
useless by the uptrending 30 minute cycle oscillators. Next
Keltner resistance is at 1091, but the indicators on this
shortened timeframe are almost certain to mislead on days like
today. The first sign of possible reversal will come with a
strong press below the 72 period MA (dark line at 1086.75).
Daily YM candles
The YM gained 92 points for a .92% gain, still very respectable
but, for the first time in 10 trading days, the weakest of its
peers. It too closed at a 52 week high, either at or above bear
flag resistance depending on the placement of the upper rising
trendline. The daily cycles are trending in upphases, and as
with the ES, it won't be over until it ends. Above 10,200, the
YM is in bull territory.
20 day 30 minute chart of the YM
The YM looks like it wants to roll over on the 30 minute chart,
just as it has all this month. In other words, bears need to be
patient for a Macd confirmation before they think of selling, and
even then, the trend is up until further notice. Opex unwinding
could put a ding in that upphase, but again, falling and rising
knives are equally dangerous.
Having been dubious of this rally for many of its moves, I see
bearishness behind every dip. Volatility is low, optimism is
high, prices are high, long term fundamentals are dubious. Mania
stocks are popular, retail investors and "Joe Sixpack" are still
excited about the capture of Saddam, et cetera. The market feels
toppy in a million different ways. But until it begins to go
lower, bears need to be either scalping with the tightest of
stops, or hibernating. Buying dips has been the winning
strategy, but I have great difficulty doing so in the current low
volatility, high optimism, high priced environment. So, for now,
patience is key, caution is key, and above all, account
preservation is job one. We want to be there for the next wave,
in whichever direction it takes us.
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****************
MARKET SENTIMENT
****************
The Return of the NASDAQ
- J. Brown
After a month of lagging behind the DJIA the NASDAQ finally
bounces back with a strong 1.8% gain. Investors were in a
holiday buying spree with visions of tech stocks dancing in their
heads. Some of today's strongest gains were found in hardware,
software, and Internets but only the rebound in the
semiconductors could come close to the surge in oil service
stocks!
Setting the mood this morning were a batch of bullish broker
upgrades and strong economic news. The better than expected drop
in jobless claims to 353,000 for the week supports the
expectation that the labor market is improving. The real
surprise today was the Philly Fed Index, which surged to 32.1 in
December. Many economists were expecting a drop from November's
already robust 25.9 reading.
The market internals were merry as advancing stocks danced past
decliners 21 to 7 on the NYSE and 21 to 10 on the NASDAQ. Up
volume was six times down volume on the NYSE and five times down
volume on the NASDAQ. It was definitely a broad-based rally
today.
We did see some volatility in the volatility indices with a
strong surge in the last two hours after the VXO hit new lows
near 14.50. I suspect it may be some last hour adjustments
before tomorrow's quadruple witching expiration when all stock
index futures, stock index options, individual stock futures and
stock options all expire.
Overall it was an extremely bullish day and it looks like the
trend for a Santa Claus rally will hold true again this year.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 10254
52-week Low : 7416
Current : 10248
Moving Averages:
(Simple)
10-dma: 10026
50-dma: 9811
200-dma: 9136
S&P 500 ($SPX)
52-week High: 1089
52-week Low : 788
Current : 1089
Moving Averages:
(Simple)
10-dma: 1070
50-dma: 1052
200-dma: 982
Nasdaq-100 ($NDX)
52-week High: 1453
52-week Low : 795
Current : 1431
Moving Averages:
(Simple)
10-dma: 1406
50-dma: 1410
200-dma: 1257
-----------------------------------------------------------------
The VXO hit new intraday lows near 14.50 before skyrocketing
higher in the last two hours of trading. I think the quadruple
witching options expiration tomorrow had traders big and small
trying to even up their positions, which may have produced a
surge in put buying.
CBOE Market Volatility Index (VIX) = 16.16 +0.58
CBOE Mkt Volatility old VIX (VXO) = 16.14 +0.79
Nasdaq Volatility Index (VXN) = 24.53 -0.59
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.65 1,083,462 704,617
Equity Only 0.55 665,543 363,051
OEX 0.94 76,123 71,640
QQQ 1.39 44,362 61,512
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 75.1 + 1 Bull Confirmed
NASDAQ-100 67.0 - 1 Bear Confirmed
Dow Indust. 80.0 + 0 Bull Correction
S&P 500 81.0 + 0 Bull Confirmed
S&P 100 80.0 - 1 Bull Correction
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-dma: 0.94
10-dma: 1.09
21-dma: 1.03
55-dma: 1.09
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
-NYSE- -NASDAQ-
Advancers 2127 2090
Decliners 698 971
New Highs 392 140
New Lows 12 15
Up Volume 1602M 1375M
Down Vol. 245M 273M
Total Vol. 1874M 1661M
M = millions
-----------------------------------------------------------------
Commitments Of Traders Report: 12/09/03
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
There is just a hint of bearishness in the Commercials who have
upped their short positions. Right on cue the small traders have
increased their long positions but to a greater extent.
Commercials Long Short Net % Of OI
11/11/03 389,965 415,259 (25,294) (3.1%)
11/18/03 393,893 414,442 (20,549) (2.5%)
12/02/03 394,531 414,223 (19,692) (2.4%)
12/09/03 396,882 420,859 (23,977) (2.9%)
Most bearish reading of the year: (111,956) - 3/06/02
Most bullish reading of the year: 18,486 - 6/17/03
Small Traders Long Short Net % of OI
11/11/03 136,072 74,249 61,823 29.4%
11/18/03 147,842 80,047 67,795 29.7%
12/02/03 154,788 85,776 69,012 28.7%
12/09/03 172,178 99,484 72,694 26.8%
Most bearish reading of the year: (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
E-MINI S&P 500
The spread is narrowing between longs and shorts in the
commercials. The opposite is happening in small traders'
positions with longs surging more than 20K contracts.
Commercials Long Short Net % Of OI
11/11/03 249,864 258,503 ( 8,639) ( 1.7%)
11/18/03 249,286 264,083 (14,797) ( 2.9%)
12/02/03 283,199 268,833 14,366 2.6%
12/09/03 294,006 288,385 5,621 1.0%
Most bearish reading of the year: (354,835) - 06/17/03
Most bullish reading of the year: 133,299 - 09/02/03
Small Traders Long Short Net % of OI
11/11/03 94,649 51,815 42,834 29.2%
11/18/03 95,119 61,975 33,144 21.1%
12/02/03 119,555 77,609 41,946 21.3%
12/09/03 142,173 76,171 66,002 30.2%
Most bearish reading of the year: (77,385) - 09/02/03
Most bullish reading of the year: 449,310 - 06/10/03
NASDAQ-100
There is a similar surge in commercial positions for the NDX
as seen in the S&P futures. Small traders also increased
long and shorts but leaning heavily on new longs.
Commercials Long Short Net % of OI
11/11/03 35,889 49,201 (13,312) (15.6%)
11/18/03 35,608 49,689 (14,081) (16.5%)
12/02/03 35,569 48,552 (12,983) (15.4%)
12/09/03 39,612 51,443 (11,831) (13.0%)
Most bearish reading of the year: (21,858) - 08/26/03
Most bullish reading of the year: 9,068 - 06/11/02
Small Traders Long Short Net % of OI
11/11/03 26,212 10,730 15,482 41.9%
11/18/03 32,034 10,356 21,678 51.3%
12/02/03 21,594 9,429 12,165 39.2%
12/09/03 25,842 10,228 15,614 43.3%
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year: 19,088 - 01/21/02
DOW JONES INDUSTRIAL
There is little to report for DJ futures by commercial
traders but small traders have significantly increased their
short positions.
Commercials Long Short Net % of OI
11/11/03 20,209 11,660 8,549 26.8%
11/18/03 20,746 11,080 9,666 30.4%
12/02/03 21,128 12,379 8,749 26.1%
12/09/03 20,378 11,934 8,444 26.1%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
11/11/03 6,105 8,201 (2,096) (14.7%)
11/18/03 5,655 8,607 (2,952) (20.7%)
12/02/03 6,667 9,302 (2,635) (16.5%)
12/09/03 6,858 12,006 (5,148) (27.3%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 8,523 - 8/26/03
-----------------------------------------------------------------
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The Option Investor Newsletter Thursday 12-18-2003
Copyright 2003, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
In Section Two:
Dropped Calls: None
Dropped Puts: AVID
Call Play Updates: HOV, QLTI, QCOM
New Calls Plays: ADI
Put Play Updates: CTSH, FD, NSM, XL
New Put Plays: None
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
None
PUTS:
*****
Avid Technology - AVID - cls: 48.90 chng: +1.93 stop: 49.75
Like it or not, it's time to concede defeat on our AVID play.
After several attempts to break decisively below the $45 support
level, the stock has bounced strongly over the past 2 days and
looks very likely to continue that move on Friday. The rebound
off the December 10th low stalled at $48.84 and today's rally
pushed above that level to close at $48.90. That looks like a
successful double bottom, especially with this week posting a
higher low. Capping off the bullish picture, daily oscillators
are all turning bullish as well. Rather than wait for our $49.75
stop to be hit, we're advocating an exit here, keeping losses to
a minimum. There will be another opportunity to play the
downside in AVID and we'll keep our eyes open for it.
Picked on December 7th at $48.46
Change since picked: +0.44
Earnings Date 1/15/04 (unconfirmed)
Average Daily Volume = 648 K
Chart =
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********************
PLAY UPDATES - CALLS
********************
Hovnanian - HOV - close: 88.40 change: +0.14 stop: 82.50
Another triple-digit gain for the DJIA and a drop in interest and
mortgage rates helped push the homebuilder index and HOV to their
third gain in a row. Unfortunately, just as the DJUSHB index
stalled under the 600 level, shares of HOV stalled at $89.30.
This level on HOV is the top of the gap down from December 10th
and it has already failed there once (today makes twice).
Nothing has changed with the market's (or our own) bullish
outlook for the homebuilders but traders might anticipate a small
dip. Look for a bounce from HOV's simple 50-dma near the $85
mark as the next entry point - or - a move up and over the $90
level.
Picked on December 16 at $87.49
Change since picked: + 0.91
Earnings Date 12/08/03 (unconfirmed)
Average Daily Volume: 827 thousand
Chart =
---
QLT Inc - QLTI - close: 18.56 chg: +0.02 stop: 17.67 *new*
We are really close to just dropping QLTI from the play list. If
it doesn't perform tomorrow we'll close it in the weekend
newsletter. Fortunately, today's candle looks like a one-day
(bullish) reversal pattern. However, the intraday weakness was a
little concerning. There was no news on the move but midday QTLI
dropped suddenly on a volume spike. Looking at the 1-minute
chart there is a spike in volume on the way down but almost more
volume on the way back up and it all happened in just a few
minutes. The rest of the day was spent slowly climbing higher as
the BTK biotech index also managed a minor gain. We are going to
raise our stop to today's low at $17.67.
Picked on December 07 at $18.86
Change since picked: - 0.30
Earnings Date 10/23/03 (confirmed)
Average Daily Volume: 1.1 million
Chart =
---
Qualcomm, Inc. - QCOM - cls: 51.48 chng: +2.16 stop: 48.00
Validating the wisdom of those that bought the dip from earlier
in the week, QCOM came charging back with enthusiasm on Thursday,
gaining more than 4% to close right back at the top of the rising
channel. As expected, the 10-dma ($49.50) provided strong
support and the stock never seriously threatened support at the
midline of the rising channel. Confirming the strength of
today's rebound was volume of 15 million shares, dwarfing the 9
million ADV. It's safe to say the dip-buyers got their chance
earlier in the week and the next likely entry point will be on a
breakout above the top of the channel and Monday's $52.00
intraday high. Until that breakout occurs, pullbacks that find
support above the 10-dma can be used for new entries. We'll
maintain our stop at $48 for now.
Picked on December 11th at $50.14
Change since picked: +1.34
Earnings Date 2/04/04 (unconfirmed)
Average Daily Volume = 9.23 mln
Chart =
**************
NEW CALL PLAYS
**************
Analog Devices - ADI - close: 45.12 change: +1.41 stop: 43.00
Company Description:
Analog Devices is a leading maker of analog (linear and mixed-
signal) and digital integrated circuits (ICs), including digital
signal processors. The company's broad line of ICS incorporate
analog, mixed-signal and digital signal processing technologies
that translate real-world phenomena such as pressure,
temperature, and sound into digital signals. ADI's products are
used in communications equipment (40% of sales), computers and
peripherals, and medical and scientific instruments. Among ADI's
more notable customers are Motorola, Dell, Lucent, and Sony.
Why we like it:
After being sold heavily right from the opening bell, the
Semiconductor index (SOX.X) was due for a rebound and it got
started right at the $475 support level this morning. The SOX
charged higher throughout the day and by the time the dust had
cleared, had gained nearly 4%, coming to rest just below the 50-
dma ($497). While not out of the woods yet, it looks like this
rebound could turn into a full-fledged rally, with a return to
the recent highs near $535, as today's rally took the SOX back
inside its rising channel. If recent patterns hold true to form,
tonight's slight disappointment on the Semiconductor Book-to-Bill
report could turn into the perfect excuse to buy, perverse as
that logic may seem. ADI has been one of the more consistent
performers in the SOX, as it has continued to trade within its
own rising channel. While there was a slight violation of the
lower channel line at yesterday's close, the rebound from that
point of support today was good for more than a 3% advance,
brining the stock up to just below its own 50-dma ($45.67).
Daily oscillators are just trying to turn bullish and if the
bulls can get some follow through going, ADI should be able to
break its recent declining trend and take a run at its highs from
earlier in the month just above $50.
The PnF chart issued a Sell signal on the recent trade below $44,
but a familiar pattern of late has been these one-box Sell
signals and then a reversal higher to trap the over-eager bears.
This looks like a repeat of that pattern. Both the 10-dma
($45.60) and 50-dma are converged just overhead and we want to
force ADI to show us some strength before playing. So we'll use
an entry trigger at $45.75. Momentum traders can enter on the
initial breakout, while bargain-hunters can look for a subsequent
pullback and rebound from above the lower channel line ($44.25)
to set up their entry. Above the 50-dma, ADI is likely to find
some resistance near $47 and then again at $48 on its way to our
$50 target. That reality gives the nod to entering on pullbacks
from tests of resistance, rather than on the breakouts. While
speculative due to the newness of the rebound, the risk reward is
favorable with our stop set at $43, just under this week's
intraday lows.
Suggested Options:
Shorter Term: The January 45 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.
Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the March 50 Call. This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run. More conservative
long-term traders looking for more insulation from time decay
will want to use the March 45 Call. Our preferred option is the
January $45 strike.
BUY CALL JAN-45*ADI-AI OI=4345 at $2.20 SL=1.00
BUY CALL JAN-50 ADI-AJ OI=2852 at $0.60 SL=0.30
BUY CALL MAR-45 ADI-CI OI=1289 at $3.90 SL=2.50
BUY CALL MAR-50 ADI-CJ OI=1465 at $1.85 SL=0.90
Annotated Chart of ADI:
Picked on December 18th at $45.12
Change since picked: +0.00
Earnings Date 2/17/04 (unconfirmed)
Average Daily Volume = 3.28 mln
Chart =
------------------------------------------------------------
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*******************
PLAY UPDATES - PUTS
*******************
Cognizant Tech. - CTSH - close: 43.53 change: +2.51 stop: 47.25
There's nothing like a little bit of high-volume volatility to
make a play interesting. CTSH gave us a very convincing
breakdown earlier in the week, with the break of horizontal
support near $44.50 and the 50-dma ($44.71). After some more
heavy selling volume yesterday that drove the stock down to just
below $41, traders had a change of heart today and bought the
stock back in equally heavy volume. With a 6% gain today, the
stock gained back all of yesterday's losses and half of those
from Tuesday. That brings price up to just below strong
resistance at the 50-dma. Either this is the setup for a
rollover entry or CTSH will blast right through, handing us a
busted play. Look for a rollover in the vicinity of the 50-dma
for a new entry point, but don't enter on strength -- we need to
see the rollover get underway first. Maintain stops at $47.25,
just over Monday's intraday high.
Picked on December 16th at $42.70
Change since picked: +0.83
Earnings Date 1/20/04 (unconfirmed)
Average Daily Volume = 997 K
Chart =
---
Federated Dept. Stores - FD - cls: 46.33 chg: +0.95 stop: 47.51
This bullish market environment is making it tough on the bears
even on stocks like FD that have clearly broken their bullish
trend. The DJIA has added 225 points in just the last three days
and investors feel confident buying the dip in just about
anything. Wal-Mart's upgrade today didn't help matters with the
retail group (if you're a bear) and shares of FD have posted
three gains in a row. The close yesterday over the $45 level is
the first warning sign for bears and today's close over $46 is
another! We would NOT suggest new plays in FD at this time and
we may close the play tomorrow for a loss but shares are still
under the $47 level and their 50-dma so we're willing to hold on
to the stock for another day.
Picked on December 15 at $44.95
Change since picked: + 1.38
Earnings Date 11/12/03 (confirmed)
Average Daily Volume: 1.7 million
Chart =
---
National Semicond. - NSM - cls: 39.38 chng: +1.42 stp: 41.40
After being consistently weak lately, the Semiconductor sector
(SOX.X) has served up plenty of volatility this week. Monday's
early rally crashed and the SOX fell all the way to the $468
level before regaining its footing and then reclaiming the $475
support level. The bulls used that level as a springboard for
today's nearly 4% gain in the sector, which pushed the SOX back
inside its rising channel. NSM has certainly had its share of
volatility this week as well. Starting with a plunge from above
$41 on Monday, the stock fell below $36 early on Tuesday before
beginning what has now turned into a respectable rebound.
Fortunately, the stock spent most of today stalled below the $40
resistance level and odds are good that we'll see price pinned
near that level on Friday due to options expiration. Next week
will be another issue though and the action in NSM will likely be
driven by what happens in the SOX. The best setup for new
entries will come from NSM rolling over below the 50-dma
($40.53), while the SOX simultaneously rolls over below the $500
level. Due to the way NSM (and the SOX) continue to bounce back
from each apparent breakdown, we would advise extreme caution in
trying to enter on breakdowns. Maintain stops at $41.40.
Picked on December 9th at $38.70
Change since picked: +0.68
Earnings Date 3/04/04 (unconfirmed)
Average Daily Volume = 3.87 mln
Chart =
----
XL Capital - XL - close: 74.06 change: +0.22 stop: 75.51
We continue to comment on XL's relative weakness and the same
holds true today. The IUX insurance index has been in a
virtually non-stop rally since Thanksgiving week and currently
hitting new highs. XL, on the other hand, is just slowly
drifting higher and has traded in a $2.00 range for the last two
weeks. Looking closer at the daily chart it almost looks like XL
is working on the right shoulder of a head and shoulder's
pattern. We continue to suggest patience. Most traders will
probably feel more comfortable opening bearish positions under
the $72 level. More aggressive traders can look for a failed
rally at $75 as a potential entry point.
Picked on December 09 at $72.60
Change since picked: + 1.46
Earnings Date 01/28/04 (unconfirmed)
Average Daily Volume: 1.2 million
Chart =
*************
NEW PUT PLAYS
*************
None
------------------------------------------------------------
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**********
Please read our disclaimer at:
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The Option Investor Newsletter Thursday 12-18-2003
Copyright 2003, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
In Section Three:
Play of the Day: CALL - ADI
Traders Corner: We Win A Few and We Lose A Few
**********************
PLAY OF THE DAY - CALL
**********************
Analog Devices - ADI - close: 45.12 change: +1.41 stop: 43.00
Company Description:
Analog Devices is a leading maker of analog (linear and mixed-
signal) and digital integrated circuits (ICs), including digital
signal processors. The company's broad line of ICS incorporate
analog, mixed-signal and digital signal processing technologies
that translate real-world phenomena such as pressure,
temperature, and sound into digital signals. ADI's products are
used in communications equipment (40% of sales), computers and
peripherals, and medical and scientific instruments. Among ADI's
more notable customers are Motorola, Dell, Lucent, and Sony.
Why we like it:
After being sold heavily right from the opening bell, the
Semiconductor index (SOX.X) was due for a rebound and it got
started right at the $475 support level this morning. The SOX
charged higher throughout the day and by the time the dust had
cleared, had gained nearly 4%, coming to rest just below the 50-
dma ($497). While not out of the woods yet, it looks like this
rebound could turn into a full-fledged rally, with a return to
the recent highs near $535, as today's rally took the SOX back
inside its rising channel. If recent patterns hold true to form,
tonight's slight disappointment on the Semiconductor Book-to-Bill
report could turn into the perfect excuse to buy, perverse as
that logic may seem. ADI has been one of the more consistent
performers in the SOX, as it has continued to trade within its
own rising channel. While there was a slight violation of the
lower channel line at yesterday's close, the rebound from that
point of support today was good for more than a 3% advance,
brining the stock up to just below its own 50-dma ($45.67).
Daily oscillators are just trying to turn bullish and if the
bulls can get some follow through going, ADI should be able to
break its recent declining trend and take a run at its highs from
earlier in the month just above $50.
The PnF chart issued a Sell signal on the recent trade below $44,
but a familiar pattern of late has been these one-box Sell
signals and then a reversal higher to trap the over-eager bears.
This looks like a repeat of that pattern. Both the 10-dma
($45.60) and 50-dma are converged just overhead and we want to
force ADI to show us some strength before playing. So we'll use
an entry trigger at $45.75. Momentum traders can enter on the
initial breakout, while bargain-hunters can look for a subsequent
pullback and rebound from above the lower channel line ($44.25)
to set up their entry. Above the 50-dma, ADI is likely to find
some resistance near $47 and then again at $48 on its way to our
$50 target. That reality gives the nod to entering on pullbacks
from tests of resistance, rather than on the breakouts. While
speculative due to the newness of the rebound, the risk reward is
favorable with our stop set at $43, just under this week's
intraday lows.
Suggested Options:
Shorter Term: The January 45 Call will offer short-term traders
the best return on an immediate move, as it is currently at the
money.
Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the March 50 Call. This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run. More conservative
long-term traders looking for more insulation from time decay
will want to use the March 45 Call. Our preferred option is the
January $45 strike.
BUY CALL JAN-45*ADI-AI OI=4345 at $2.20 SL=1.00
BUY CALL JAN-50 ADI-AJ OI=2852 at $0.60 SL=0.30
BUY CALL MAR-45 ADI-CI OI=1289 at $3.90 SL=2.50
BUY CALL MAR-50 ADI-CJ OI=1465 at $1.85 SL=0.90
Annotated Chart of ADI:
Picked on December 18th at $45.12
Change since picked: +0.00
Earnings Date 2/17/04 (unconfirmed)
Average Daily Volume = 3.28 mln
Chart =
------------------------------------------------------------
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**************
TRADERS CORNER
**************
We Win A Few and We Lose A Few
By Mike Parnos, Investing With Attitude
The law of averages kicked in. The market got carried away and it
carried away some of our profits at the same time. We had to use
all the discipline we could muster, but we closed out the
positions in question and took our medicine. Repeat after me: A
loss is not a loss. It's the cost of doing business. A small
loss is a headache that can be handles with a few Tylenol. A big
loss is like having a C-section or a sigmoidoscopy. It's your
choice.
Here's the medicine we took. Remember, always read the label to
get the dosage right.
BBH Iron Condor:
I thought we were in pretty good shape. I was wrong. It happens.
We had taken in $3.85 of premium. But the market has a will of
its own and today BBH was pushed up past our exit. That was our
cue. We bought back the short December $130 call for $4.05.
There was no value in the $140 call. The result was a loss of
$.20 or $200.
SPX Iron Condor:
The suspense is over. I thought it was going to be close. In
previous months the SPX hovered close to the short strike and we
made out reasonably well. It appears that 1085 was about five
points too low. When the SPX violated 1085 with no sign of
weakening, we bought back the short SPX December 1085 call for
$2.75 (x 7 = $1,925). A few minutes later we sold the long 1100
call for $.20 (x 7 = $140). Total debit for closing the spread
was $1,785. We had taken in a total of $2,205 in premium. The
result was a small net profit of $420.
We were very fortunate that the market moved late in the option
cycle. Most of the time value had eroded away, allowing us to eek
out a little profit instead of getting nailed for a substantial
loss. At least we don't have to sweat out an SPX opening
settlement price.
QQQ ITM Strangle Position Adjustment:
This isn't earth shattering, but it's a positive with potential.
Wednesday, the December $34 puts were bidding $.05 and asking
$.10. We we're going to be buying back those calls by Friday as
part of the rolling out process. Just for the hell of it, I threw
out an order to buy the 10 contracts of the Dec. $34 puts for
$.05. The nice part is that it cost nothing to put out an order.
The even nicer part is that towards the end of the day Wednesday,
the order was filled. Why? Who knows? The QQQs didn't move much
Since we were going to buy them back anyway, how does that help
us? It's an opportunity thing. Well, a lot can happen on
Thursday and Friday. At the time the order was filled on
Wednesday, the January $34 puts were selling for $.60 with the
QQQs trading at $34.91. If I sold the January $34 puts on
Wednesday, I would have taken in $.55 – not bad, but it could get
better.
If, on Thursday, the QQQs traded down $.50 or $1.00 – even
intraday – the January $34 puts would have gone up dramatically
and I would have been able to bring in $.80 to $1.25. If the
market continued up, the January $34 puts will go down in value
(which is what happened). Was it worth the risk? The market is
fickle lately, bouncing around. If I paid attention and take
advantage of opportunities (that didn't happen on Thursday), there
was a chance of improving my credit beyond the $.55 I could have
locked in on Wednesday. I was wrong again.
Bottom line is that the QQQs moved up, instead of down, and we
ended up rolling the December $34 puts and calls into the January
$34 puts and calls for a credit of $.85 or $850.
______________________________________________________________
OEX Credit Spread Boogie
The OEX continued its move up. We have rules in the Credit Spread
Boogie, so, even though it's close, we had to act. Wednesday, we
closed out the December OEX 520/545 spread (two contracts) for
$15.60 ($3,120). Because the OEX moved up so late in the month,
we had to roll the position out to January. Therefore, we put on
the OEX January 535/505 bull put spread for a credit of $6.70.
We had to make up the $3,120 it cost to close the original
December bear call spread, so we had to establish a five-contract
position. We took in $3,400. However, our maintenance
requirement increased from $5,000 to about $15,000.
Now, we have to wait another month. However, if the OEX finishes
above 535, we'll keep the original $1,490 plus another $280.
__________________________________________________________________
January Position Preview
What are we looking at as possible trades for the January cycle?
We have to give the SPX a chance to redeem itself. Plus, the NDX
behaved nicely and made us money.
Based on Thursday's closing prices, here are a few numbers to
juggle around.
An NDX Iron Condor – five contracts – 1350/1325 bull put spread
with a 1525/1550 bear call spread. Should bring in a total of
about $3,100.
A SPX Iron Condor. 1125/1150 bear call spread (5 contracts) and
1045/135 bull put spread (10 contracts). Should bring in about
$2,300. Hopefully, the SPX will open some additional strike
prices in the next day or two on the top side to give us some more
choices.
Remember, dramatic things can happen on Friday and over the
weekend. These numbers will probably differ significantly from
our ultimate CPTI positions. The above ideas are food for
thought. Don't worry. It's lo-cal food.
__________________________________________________________________
DECEMBER CPTI PORTFOLIO POSITIONS
SPX Iron Condor – 1089.18
We sold 7 contracts of December 1085 SPX calls and bought 7
contracts of December 1100 calls for net credit of about $1.75
($1,225). Then, sold 7 contracts of December 1005 SPX puts and
bought 7 contracts of December 990 puts for net credit of about
$1.40 ($980). Total credit $2,205. Maximum profit range of 990
to 1085. Max profit potential of $2,205.
BBH -- Baby Iron Condor - $134.07
BBH looks to be in a trading range. To take advantage of this
range we sold 10 contracts of the Dec. BBH $130 calls and bought
10 of the Dec. $140 calls for a credit of about $2.00. Then, we
sold 10 contracts of the Dec. BBH $125 puts and bought the $115
puts for a credit of about $1.85. Total credit and maximum
potential profit of $3.85 if BBH finishes between $125 and $130.
Safety range and suggested bailout points would be $121.15 and
$133.85. Maximum potential profit of $3,850. Closed for $200
loss. (See article above).
OEX Credit Spread Boogie – 540.49
We sold 2 December OEX 520 calls @ $9.00
We bought 2 December OEX 545 calls @ $1.55
Total credit and potential maximum profit of $7.45 ($1,490).
Exposure $17.55 ($3,510). Maintenance $25.00 ($5,000). Rolled
out to January bull put spread. (See article above).
NDX Iron Condor – 1431.30
Here's an index we haven't traded before. The NDX mirrors the
NASDAQ 100 stocks, just like the QQQs. We sold six December NDX
1325 puts and buy the December NDX 1300 puts, taking in about
$1.70. Then, we sold six December NDX 1525 calls and buy the
December 1550 calls for a credit of about $1.00. Total credit:
$2.70. Maximum profit range of 1325 to 1525.
QQQ ITM Strangle – Ongoing Long Term -- $35.56
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300. We're
going to make money by selling near term puts and calls every
month. Here's what we've done so far – all in 10 contract
quantities.
October: Sold Oct. $33 puts and Oct. $34 calls -- total credit of
$1,900. November: Sold Nov. $34 puts and calls – total credit of
$1,150.
December: Sold Dec. $34 puts and calls – total credit of $1,500.
January: Sold Jan. $34 puts and calls – total credit of $850.
(See article above).
Note: Each month, near expiration, we buy back the expiring
options and sell options for the next option cycle. We haven't
included any of the proceeds from this long term QQQ ITM Strangle
in our profit calculations. It's a bonus!
QQQ Put Calendar Spread – Ongoing -- Trading @ $35.56
We created a cheap play that will let us take advantage of a nice
down move. Meanwhile, we sold against the January puts while we
waited. Bought 10 January 04 QQQ $32 puts and sold 10 October 03
QQQ $32 puts for a total debit of $1.00 ($1,000). We rolled out to
the November $32 and took in a $.30 credit and then rolled to the
December $32 puts for another credit of $.40. Our cost basis is
now only $.30. On Tuesday, we closed out the long January puts
for $.20 and accepted a dime loss ($100). It was a long way to go
without a lot (or anything) to show for it. However, if the QQQs
have moved as hoped, we would have profited nicely. The best part
is that the risk was so small.
______________________________________________________________
New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find
past CPTI (Mike Parnos) articles, look under "Education" on the OI
home page and click on "Traders Corner." They're waiting for you
24/7.
___________________________________________________________
Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP
_____________________________________________________________
Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these
strategies.
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